How Digital Marketing Works: Ad Exchanges

Digital marketing has become an algorithmic math equation in recent years. However, with billions of ad impressions flying around the internet, it makes sense that complex trading systems have been created to handle all that inventory.

How do digital ad exchanges work?

Ads are placed on what are called ad exchanges. Here at GEM, our Director of Media is responsible for working with ad exchange vendors to load in all the creative ads and daily budgets. Think of it like an eBay bid: You know you want a sweater, so you set your account to bid up to $20 for it. Then, the system takes over and does the bidding for you, until voila - you've either won or lost the sweater.

Similarly, digital ad exchanges - including Google and Facebook - work the same way, but with lots of "sweaters." We put in the type of person we want, based on demographic (age, location), psychographic (likes, preferences), and behavioral triggers (sites visited, searches made, etc.). Then, we set daily budgets for how much we want to bid on those types of users. Simultaneously, we load our creative designs into the system, and they get pulled and placed as we win bids.

How does an ad get placed?

Every time a person in our target market lands on a website that has digital ads in it (these can be news outlets, blogs, or countless other sites), a real-time auction occurs. In essence, our data is bidding against the data of other advertisers who want to reach the same type of person. Whomever wins the auction - in just a fraction of a second - gets their ad placed, and that's what the user sees.

This system is far more efficient and budget-friendly than buying inventory on a single site or even a group of sites, because once you place a buy on a single site, you are locked into that program whether people visit the site or not. With the auction system, we know our ads are getting delivered to people who are in our target market and actively online right then and there. And because the system is an auction, we never overpay for inventory because we have limits in place to control the budget.

Finally, ad exchanges run on algorithms that naturally improve over time. That's why longer programs - over many months - get more efficient and reach more people over the course of the campaign. In addition, we test new target markets and new creative over time to continually optimize the reach and effectiveness of the buy. The ability to test and measure is what makes digital advertising so compelling as compared to other forms of media, and that's why digital is a must-have for the vast majority of companies looking to advertise.